Bankruptcy trial: 'The fight is going to be on'

Wednesday

Mar 27, 2013 at 12:01 AMMar 27, 2013 at 12:00 PM

SACRAMENTO - Stockton's bankruptcy trial is expected to conclude today - ahead of schedule - with the judge deciding if the city is eligible for Chapter 9 protection, despite hard-fought challenges from creditors who call it an unfair fight.

Scott Smith

SACRAMENTO - Stockton's bankruptcy trial is expected to conclude today - ahead of schedule - with the judge deciding if the city is eligible for Chapter 9 protection, despite hard-fought challenges from creditors who call it an unfair fight.

Once Stockton is deemed eligible - a result bankruptcy attorney Karol Denniston anticipates - city officials will kick their case into high gear.

"Once you get eligibility, this case is going to rock 'n' roll," she said. "To use a sports metaphor: The capital market creditors are going to be playing defense."

The fight will intensify because Stockton has so far decided to leave its employee pensions untouched.

The California Public Employees' Retirement System, whose attorneys have largely sat on the sidelines of Stockton's trial that started Monday, will come to the forefront. Wall Street creditors will argue that the pension manager should be forced to take a hit, just like them, Denniston said.

"The fight's going to be on," said Denniston, an attorney at Schiff Harden LLP who is closely monitoring Stockton's trial.

Stockton filed Chapter 9 on June 28, making it the nation's largest city to seek bankruptcy protection.

Upon filing, the city also phased out payments to the health care of city retirees and stopped payment on certain bonds. Assured Guaranty Corp. and National Public Finance Guarantee Corporation, the two firms leading the case against Stockton, insured those bonds worth millions.

But Stockton didn't reduce its payments to CalPERS, a bill this year totaling $30 million, because officials said that doing so would harm city employees, causing a mass exodus from the already thin work force, especially in the Police Department.

An attorney for Assured Guaranty on Monday called CalPERS the "800-pound gorilla" in Stockton's bankruptcy trial.

U.S. Bankruptcy Judge Christopher Klein, who is overseeing the case, has said he was inclined to allow Stockton into bankruptcy protection without a trial, but he wanted to create a thorough appellate record, anticipating an appeal to the Bankruptcy Appellate Panel.

The trial was expected to last four days, but with the end likely today, that will have run one day short.

Given Klein's position, Denniston said an appeal is less likely, or if one is filed, it will be a sideshow, not slowing down Stockton's next move to file a plan of adjustment. That plan restructuring the city's finances will spark the real controversy over CalPERS, she said.

Attorneys for CalPERS argue that they aren't a creditor like the commercial investors, and by law they are protected from the city's attempt to reduce payments.

Denniston said that she believes Stockton already has its plan of adjustment prepared, and that document likely won't include CalPERS. The creditors will push back in even grander fashion at that point, Denniston said.

"They're going to say, 'This isn't fair. CalPERS is just like us. CalPERS needs to be impaired,'" she said.

In court Tuesday, the creditors tried to pick apart Stockton's position while cross examining city officials.

Former Chief Financial Officer David Millican testified about his role helping prepare the Chapter 9 filing. Millican, a former deputy city manager in Fremont, said the city is on course to emerge from Chapter 9 with a $100 million gap over 10 years.

That figure is a "hypothetical" deficit projection, Millican said, that officials will have to use as a guide for future budgeting. The city will have to come to grips with that projection and avert it, he said.

That projection is spelled out in the city's massive 790-page "ask" document, which Stockton provided to creditors at the start of pre-bankruptcy mediation, Millican said.

No tax initiatives were considered leading into bankruptcy, because the city's cash was quickly running out. There was no time to launch a tax campaign to convince voters to pass a tax hike, Millican said.

Today, Councilwoman Kathy Miller is expected to be called to testify as the trial's final witness, followed by attorneys' closing arguments. Klein has said he will issue an oral ruling from the bench at the trial's close.